What are the primary risks of buying a short sale home? I've been looking at it as a way to buy a home cheaply, and I understand that repairs may be in order. However I've been warned (in general terms) that there are other risks or difficulties in buying a short sale besides the state and quality of the property?

2 Answers
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It is mentally stressful. Negotiating with a bank and a person means you better have plenty of free time and low expectations. Bank will (justifiably I suppose) negotiate via bureaucracy rather than from the standpoint of someone who wants to sell. You might think it is all said and done just to have the bank pull out at the last minute or want more money.

If you are looking to buy and will be timing the purchase, banks are awfully risky. You have to be fully willing and able to walk away from the deal at almost anytime.

Existing liens can kill the deal. When you buy a foreclosure,
typically the lender has settled, or paid off, all existing liens
attached to the property. You should be buying the foreclosed property
lien-free. But a short sale property has not gone through the process
of cleansing the liens from the title, so beware. You'll be asked to
take title subject to the liens, meaning that you will now be
responsible for them. So plan your budget accordingly and try to get
everything paid off at the closing.

Unknown liens can be expensive land mines. A bigger problem is
the presence of unknown liens attached to a short sale title. An
attorney recently shared a story about a short sale where a $45,000
tax lien cropped up after all the other issues had been worked out and
the lender had accepted a price. This sudden $45,000 shortfall almost
killed the deal. Ultimately, the lender accepted less, and the deal
closed.

More than one lender means double trouble. It's bad enough
negotiating with one lender. But if the homeowner has taken out a
second or third mortgage, you'll have a bunch of lenders standing in
line, each of whom has to agree to the short sale.

You might wait six months, only to find out your offer wasn't
approved. Lenders don't appear to be in any hurry to accept a short
sale offer. Why? Once the short sale offer is approved, the lender has
to write off the missing principal as a loss. For a primary lender who
might have some or most of the loan repaid, this might not be that big
of a write-off. But a second or third lender will be left with nothing
and have no incentive to approve the deal. Any of these lenders, or
all of them, might kill your deal.

You might have to pay more than you agreed or risk losing the
deal. You might find out after months of working on the deal that one
of the lenders requires more money to close. Everyone in the deal will
look to the buyer for the cash. You have to decide what you're willing
to spend to make the deal happen. At some point, the short sale might
not be worth it.

Unforeseen issues can crop up at any time and delay or kill the
deal. The longer it takes to approve a short sale, the more issues can
arise that will delay or kill the deal. If you're buying a short sale,
you should absolutely hire your own attorney (not the lender's closing
attorney), who can represent your interests in the deal and provide
you with cover should you decide not to move forward with the
purchase.

We tried to buy a house on short sale, but they couldn't get in contact with the actual owner for several weeks, so we ended out not buying. Probably would have changed where I currently am by quite a bit.
– Wayne WernerMar 25 '16 at 14:40

Title Problems: Typically people always try to pay their mortgage. If someone stops doing that, what else are they not paying? Common items that may not show up in a title search are water/sewer bills, property taxes or fees levied by the city (think punitive fines/fees for snow-removal or lawn mowing issues) or HOA fees. Less common items are things like mechanics liens due to non-payment for work on the home.

Delays: The short sale process is excruciating, and can take six months easily. That causes all sorts of problems for you... plus it can exacerbate title issues.

Also keep in mind that you're typically dealing with big banks who don't really care too much about the outcome of a particular sale, and will squeeze you for whatever they want in the final hours before closing. So the advice "hire a lawyer" is important, but it's critical to hire the right attorney who understands what he is doing, and even more critical to be willing to walk away at any time.